Question

Nachman Industries just paid a dividend of D0 = $3.75. Analysts expect the company's dividend to...

Nachman Industries just paid a dividend of D0 = $3.75. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

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Answer #1
Required rate= 9.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 3.75 30.00% 4.875 4.875 1.09 4.4725
2 4.875 10.00% 5.3625 140.766 146.1285 1.1881 122.99343
Long term growth rate (given)= 5.00% Value of Stock = Sum of discounted value = 127.47
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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